The Center for American Progress (CAP) and similar liberal organizations contend that government must help change the US energy mix. Although past efforts over the past 40 years make clear that as former Treasury Secretary Larry Summers told President Obama, “the government is a crappy venture capitalist.” The verdict is in: industrial policy doesn’t work!
Organizations like CAP believe that government must help “infant industries” get on their feet and then work with them to change economic and energy decisions.
Last year, the George C. Marshall Institute published a critique of the infant industry argument– The Infant Industry Argument and Renewable Energy Production–http://marshall.org/energy-policy/the-infant-industry-argument-and-renewable-energy-production/–that demonstrated why such industrial policy initiatives don’t work. Research on government R&D initiatives show that it is successful when government is the final consumer; not when it is trying to push something in the market place.
CAP makes much out of the fact that Tesla motors has brought in almost $1 billion in revenue but ignores the fact that most of that comes from Tesla selling ZEVs credits to meet state mandates. Tesla has a monopoly on those right now and according to the Wall Street Journal could collect $250 million in credit sales this year. Selling something that it doesn’t make is one route to profitability but it is a short-term boon created by government, not the forces of supply and demand. When automakers come out with their own ZEVs, Tesla’s primary source of revenue will evaporate. Tesla has also profited from hyping its stock, suggesting that subsidies are working to bring to market the car of the future. In reality, the stock run up based on heavily subsidized vehicles simply validates the greater fool theory. In the near term future, shrewd investors are likely to get out early leaving trusting investors holding the bag.
CAP also tries to argue that loan guarantees, tax credits, and direct loans provide access to affordable debt that would not otherwise be available. That is true and it is true for a good reason. The private capital market knows that most of these alternative energy projects have little chance of being commercially viable any time soon.
Targeted loan guarantees and tax credits provide incentives for political entrepreneurs to support policy initiatives as a way to enrich themselves in the regulatory process instead of in the market place. Examples such as Tesla, Fisker Motors, Solyndra, A123 Batteries validate the Baptist and Bootlegger public choice theory.
The Wall Street Journal recently had an opinion piece—How Government is Making Solar Billionaires—that explains how political entrepreneurship works. The example cited is Solar City, which just happens to be run by Tesla’s founder and CEO. Even though the firm lost $61 million in the first 6 months of this year, its stock price has “soared” and when combined with the run-up in Tesla’s share price, the founder’s net worth has increased by more than $5 billion. That would be great if it was the result of winning in the market place. But, as the Journal points out, its filing with the SEC states, “the company’s ability to provide solar energy systems to customers on an economically viable basis depends on our ability to finance these systems with fund investors who require particular tax and other benefits.” In other words, investors need subsidies—the reallocation of taxpayer dollars to investors– to make the company viable.
Adam Smith and Milton Friedman must be spinning in their graves at warp speed.
This article appeared on the FuelFix weblog at http://fuelfix.com/blog/2013/10/25/handouts-are-not-helping-hands/